Investors are betting on three UK interest rate cuts this year after the economy fell into recession.
At the end of a week of crucial economic data, the Bank of England is now expected to reduce overall borrowing costs from 5.25 percent to 4.5 percent by Christmas.
The timing of the first move remains uncertain, with bets in financial markets suggesting a 20 percent chance of it happening in May, 60 percent in June and 80 percent in August.
The pound fell to $1.2591 and €1.1696, while gold yields fell in bond markets as investors increased bets on rate cuts.
Thomas Pugh, British economist at consultancy RSM UK, said: “A recession gives the Bank more cover to pivot towards lowering interest rates as early as the spring.”
Recession: At the end of a week of crucial economic data, the Bank of England is now expected to reduce overall borrowing costs from 5.25% to 4.5% by Christmas.
Megan Greene, who sits on the Bank of England’s rate-setting monetary policy committee (MPC), said she needs to see more evidence that inflation is returning to target before voting for rate cuts.
The economist, who until this month voted in favor of raising rates, said they will have to “remain restrictive for some time for inflation to sustainably return” to 2 percent.
However, expectations are likely to change again, after this week’s sharp swings when investors had to deal with a deluge of official figures.
On Tuesday, the Office for National Statistics (ONS) revealed that wages are rising at a year-on-year rate of 6.2 per cent faster than expected, fueling fears that wage growth is too strong for the Bank of England to cut interest rates soon. .
And data in the United States showed inflation in the world’s largest economy was “hot” at 3.1 percent, dashing hopes of an early rate cut by the Federal Reserve.
However, a rate cut in the UK this spring or early summer looked possible again on Wednesday when the ONS said inflation had remained firm at 4 percent in January, contradicting expectations of an increase.
And pressure on the Bank increased yesterday after the ONS said the economy contracted 0.3 per cent in the final three months of 2023, meaning the UK is in recession after a 0.1 contraction. percent in the previous quarter.
The MPC will pore over the figures as it weighs up when and whether rate cuts are appropriate.
Julian Jessop, economics fellow at the Institute of Economic Affairs, said: “The MPC’s job is to worry about inflation, not growth, but the case for early rate cuts is now even stronger.”
And Nicholas Hyett, investment analyst at Wealth Club, said: ‘With inflation lower than expected this week, news that the UK is in recession will lead to increasing pressure on the Bank of England to cut interest rates. .
“But while the recession is clearly bad news for the UK economy, it is worth bearing in mind that as recessions go, it is still a very mild recession and could still be revised to eliminate it completely.”
“It remains to be seen whether the current recession becomes something remembered outside the pages of an economic history textbook.”